The variance for Steady Corp’s stock is 3.6%; the variance for Techie Corp’s sto
ID: 2744169 • Letter: T
Question
The variance for Steady Corp’s stock is 3.6%; the variance for Techie Corp’s stock is 14.4%. What’s the variance for a portfolio of (25%, 75%) of these two stocks, if the correlation coefficient between the two stocks’ returns is 0? The answer would be .083. How would your answer change if the correlation coefficient changes? -Variance of the portfolio increases as the correlation between the stock returns increases, which means a larger degree of diversification. -Variance of the portfolio increases as the correlation between the stock returns declines, which means a larger degree of diversification. -Variance of the portfolio increases as the correlation between the stock returns declines, which means less diversification. -Variance of the portfolio increases as the correlation between the stock returns increases, which means less diversification.
Explanation / Answer
If the correlation coefficient changes,the variance of the portfolio increases as the correlation between the stock returns increases, which means less diversification.
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